Item
1. Business
Introduction
This
Annual Report on Form 10-K should be read together and in connection with the other reports that have been filed by us with the SEC for
a comprehensive description of our financial condition and operating results. In the interest of disclosure, we have included in this
Form 10-K certain material events and developments that have taken place through the date of filing of this Form 10-K with the SEC.
In
this Annual Report on Form 10-K, INVO Bioscience, Inc. (INVO Bioscience, Inc., together with its subsidiaries, is referred to in this
document as “we”, “us”, “INVO Bioscience”, “INVO,” or the “Company”), incorporates
by reference certain information from parts of other documents filed with the Securities and Exchange Commission (“SEC”).
The SEC allows us to disclose important information by referring to it in that manner. Please refer to all such information when
reading this Annual Report on Form 10-K. All information is as of December 31, 2021, unless otherwise indicated. For a description
of the risk factors affecting or applicable to our business, see “Risk Factors,” below.
The
Company
We
are a commercial-stage fertility company dedicated to expanding the assisted reproductive technology (“ART”) marketplace
by making fertility care accessible and inclusive to people around the world. Our flagship product is INVOcell, a revolutionary medical
device that allows fertilization and early embryo development to take place in vivo within the woman’s body. Our primary
mission is to implement new medical technologies aimed at increasing the availability of affordable, high-quality, patient-centered fertility
care. This treatment solution is the world’s first intravaginal culture technique for the incubation of oocytes and sperm during
fertilization and early embryo development. This technique, designated as “IVC”, provides patients a more natural, intimate
and more affordable experience in comparison to other ART treatments. The IVC procedure can deliver comparable results at a lower cost
than traditional in vitro fertilization (“IVF”) and is a significantly more effective treatment than intrauterine
insemination (“IUI”). Our commercialization strategy is focused on the opening of dedicated “INVO Centers”
offering the INVOcell and IVC procedure (with three centers in North America now operational), in addition to continuing to sell our
technology solution into existing fertility clinics.
We
were formed on January 5, 2007, under the laws of the Commonwealth of Massachusetts under the name Bio X Cell, Inc. to acquire
the assets of Medelle Corporation (“Medelle”). Dr. Claude Ranoux purchased and contributed all of the assets of Medelle,
including four patents relating to the INVOcell technology, to Bio X Cell, Inc. upon its formation in January 2007.
On
December 5, 2008, Bio X Cell, Inc., doing business as INVO Bioscience, and each of the shareholders of INVO Bioscience entered into a
share exchange agreement and consummated a share exchange with Emy’s Salsa AJI Distribution Company, Inc., a Nevada corporation
(“Emy’s”). Upon the closing of the share exchange on December 5, 2008, the INVO Bioscience shareholders transferred
all of their shares of common stock in INVO Bioscience to Emy’s. In connection with the share exchange, Emy’s changed its
name to INVO Bioscience, Inc. and Bio X Cell, Inc. became a wholly owned subsidiary of Emy’s (re-named INVO Bioscience, Inc.).
Recent Developments
In January 2022, we issued 94,623 shares of common
stock to Paradigm Opportunities Fund, LP (“Paradigm”). The shares were issued pursuant to the exemption from registration
provided by Section 4(a)(2) of the Securities Act of 1933, as amended. We received $315,000 in proceeds from this issuance. Pursuant
to its terms, on March 30, 2022, we terminated the stock purchase agreement with Paradigm, under which Paradigm had committed to purchase
600,703 shares of our common stock for an aggregate purchase price of $1,999,740.29. We issued our termination notice when it became
clear that Paradigm would not be able to fulfil its commitment in a timely fashion.
On March 29, 2022, the joint venture agreement
between INVO and Medesole Healthcare and Trading Private Limited, India was terminated by us pursuant to the terms of the joint venture
agreement after mutual agreement with Medesole that Medesole would not be able to fulfil its commitments in a timely fashion.
Operations
We
operate with a core internal team and outsource certain operational functions in order to help accelerate our efforts as well as reduce
internal fixed overhead needs and in-house capital equipment requirements. Our most critical management and leadership functions are
carried out by our core management team. We have contracted out the manufacturing, packaging/labeling and sterilization of the device
to a contract medical manufacturing company that completes final product manufacturing as well as manages the gamma sterilization process
at a U.S. Food and Drug Administration (“FDA”) registered contract sterilization facility.
Employees
As
of December 31, 2021, we had ten full time and two part time employees. We also engage key consultants to further support our operations.
Market
Opportunity
The global ART marketplace is a large, multi-billion
industry growing at a strong pace in many parts of the world as increased infertility rates, increased patient awareness, acceptance
of treatment options, and improving financial incentives such as insurance and governmental assistance continue to drive demand. According
to the European Society for Human Reproduction 2020 ART Fact Sheet, one in six couples worldwide experience infertility problems. Additionally,
the worldwide market remains vastly underserved as a high percentage of patients in need of care continue to go untreated each year for
many reasons, but key among them are capacity constraints and cost barriers. While there have been large increases in the use of IVF,
there are still only approximately 2.6 million ART cycles, including IVF, IUI and other fertility treatments, performed globally each
year, producing around 500,000 babies. This amounts to less than 3% of the infertile couples worldwide being treated and only 1% having
a child though IVF. The industry remains capacity constrained which creates challenges in providing access to care to the volume of patients
in need. A survey by “Resolve: The National Infertility Association,” indicates the two main reasons couples do not use IVF
is cost and geographical availability (and/or capacity).
In the United States, infertility, according to
the American Society of Reproductive Medicine (2017), affects an estimated 10%-15% of the couples of childbearing-age. According to the
Centers for Disease Control (“CDC”), there are approximately 6.7 million women with impaired fertility. Based on preliminary
2020 data from the CDC’s National ART Surveillance System, approximately 326,000 IVF cycles were performed at 449 IVF centers,
leaving the U.S. with a large, underserved patient population, which is similar to most markets around the world.
Competitive
Advantages
We believe that the INVOcell, and the IVC procedure
it enables, have the following key advantages:
Lower
cost than IVF with equivalent efficacy. The IVC procedure can be offered for less than IVF due to lower cost of supplies, labor,
capital equipment and general overhead. The laboratory equipment needed to perform an IVF cycle is expensive and requires ongoing costs
as compared to what is required for an IVC cycle. As a result, we also believe INVOcell and the IVC procedure enable a clinic and its
laboratory to be more efficient as compared to conventional IVF.
The
IVC procedure is currently being offered at practicing clinics at a range of $5,000 - $11,000 per cycle and from $4,500 to $7,000 at
the existing INVO Centers, thereby making it more affordable than conventional IVF (which tends to average $12,000 to $17,000 per cycle
or higher).
Improved
efficiency providing for greater capacity and improved access to care and geographic availability. In many parts of the world,
including the U.S., IVF clinics tend to be concentrated in higher population centers and are often capacity constrained in terms of
how many patients a center can treat, with volume often limited by the number of capital-intensive incubators available in IVF
clinic labs. With the significant number of untreated patients along with the growing interest and demand for services, the industry
remains challenged to provide sufficient access to care and to do so at an economical price. We believe INVOcell, and the IVC
procedure it enables, can play a significant role in helping to address these challenges. According to the 2020 CDC Report, there
are approximately 449 IVF centers in the U.S. We estimate that by adopting the INVOcell, IVF clinics can increase fertility cycle
volume by up to 30% without adding to personnel, space and/or equipment costs. Our own INVO Centers also address capacity
constraints by adding to the overall ART cycle capacity and doing so with comparable efficacy to IVF outcomes as well as at a lower
per cycle price. Moreover, we believe that we are uniquely positioned to drive more significant growth in fertility treatment
capacity in the future by partnering with existing OB/GYN practices. In the U.S., there are an estimated 5,000 OB/GYN offices, many
of which offer fertility services (usually limited to consultation and IUI, but not IVF). Since the IVC procedure requires a much
smaller lab facility, less equipment, and fewer lab personnel (in comparison to conventional IVF), it could potentially be offered
as an extended service in an OB/GYN office. With proper training and a lighter lab infrastructure, the INVOcell could expand the
business for these physicians and allow them to treat patients that are unable to afford IVF and provide patients with a more
readily accessible, convenient, and cost-effective solution. With our three-pronged strategy (IVF clinics, INVO Centers and OB/GYN
practices), in addition to lowering costs, we believe INVOcell and the IVC procedure can address our industry’s key
challenges, capacity and cost, by their ability to expand and decentralize treatment and increase the number of points of care for
patients in need. This powerful combination of lower cost and added capacity has the potential to dramatically open up access to
care for patients around the world.
Greater patient involvement. With the IVC
procedure, the patient uses their own body for fertilization, incubation and early embryo development which creates a greater sense of
involvement, comfort and participation. In some cases, this may also free people from barriers related to ethical or religious concerns,
or fears of laboratory mix-ups.
Sales
and Marketing
Our product commercialization efforts are
focused on identifying distributors and partners within targeted geographic regions that we believe can best promote, market, and
sell the INVOcell and support our efforts to expand access to advanced fertility treatment for the large number of underserved
infertile people hoping to have a baby. We believe that the IVC procedure is an effective and affordable treatment option that
greatly reduces the need for more expensive IVF lab facilities and allows providers to pass on related savings to patients without
compromising efficacy. We have been cleared to sell the INVOcell in the United States since November 2015 after receiving de novo
class II clearance from the FDA. Our primary focus has been on establishing INVO Centers to promote the INVOcell and the IVC
procedure, selling the INVOcell directly to U.S. fertility clinics, and developing key international market partnerships around the
world.
We
anticipate that we will experience quarterly fluctuations in our revenue as we expand the sales of the INVOcell to new markets in
the U.S. and globally. We continue to seek partners that will contractually commit to meeting agreeable performance objectives that
are consistent with our goals and objectives.
Ferring
On
November 12, 2018, we entered into a U.S. Distribution Agreement (the “Ferring Agreement”) with Ferring International Center
S.A. (“Ferring”), which closed on January 14, 2019. Pursuant to the Ferring Agreement, among other things, we granted Ferring
an exclusive license in the United States to market, promote, distribute, and sell the INVOcell. Ferring was responsible, at its own cost,
for all commercialization activities for in the United States. We retained a limited exception to the exclusive license granted to Ferring
allowing us, subject to certain restrictions, to establish up to five INVO Centers in the United States, which as of March 2, 2021, was
amended to seven centers. We retained all commercialization rights for the INVOcell outside of the United States.
On
November 2, 2021, Ferring notified us of its intention to terminate the Ferring Agreement, which required 90-days prior written notice.
Accordingly, the Ferring Agreement officially terminated on January 31, 2022. Pursuant to the terms of the Ferring Agreement, upon notice
of termination, Ferring was required to use commercially reasonable efforts to transition any customers to us and otherwise facilitate
the orderly transition of the distribution from Ferring to us. By its terms, our Supply Agreement with Ferring also terminated on January
31, 2022.
The
Ferring license was deemed to be a functional license that provides the counterparty with a “right to access” to our intellectual
property during the subscription period and accordingly, revenue is recognized over a period of time, which is generally the subscription
period. During the years ended December 31, 2021, and 2020, we recognized $3.6 million and $0.7 million of revenue related to the Ferring
license agreement, respectively.
As of December 31, 2021, we had no deferred revenue
related to the Ferring Agreement as it was recognized in the fourth quarter of fiscal year 2021 in relation to the contract termination.
The likelihood of Ferring exercising its rights became remote at the time notice of termination was received therefore INVO recognized
the full remaining amount of the deferred revenue.
International
Distribution Agreements
We
have entered into exclusive distribution agreements for a number of international markets. These agreements usually have an initial term
with renewal options and require the distributors to meet minimum annual purchases, which vary depending on the market. We are also required
to register the product in each market before the distributor can begin importing, a process and timeline that can vary widely depending
on the market.
The
following table sets forth a list of our current international distribution agreements:
|
|
|
|
|
|
|
|
INVOcell
Registration |
Market |
|
Distribution
Partner |
|
Date |
|
Initial
Term |
|
Status
in Country |
|
|
|
|
|
|
|
|
|
Canada |
|
Invaron
Pharmaceuticals Inc. |
|
July
2020 |
|
1-Year |
|
Completed |
Mexico
(a) |
|
Positib
Fertility, S.A. de C.V. |
|
Sept
2020 |
|
TBD** |
|
Completed |
Malaysia |
|
iDS
Medical Systems |
|
Nov
2020 |
|
3-year |
|
Completed |
Jordan |
|
Biovate |
|
Sept
2019 |
|
1-year |
|
Completed |
Pakistan |
|
Galaxy
Pharma |
|
Dec
2020 |
|
1-year |
|
In
process |
Thailand |
|
IVF
Envimed Co., Ltd. |
|
April
2021 |
|
1-year |
|
Complete |
Sudan |
|
Quality
Medicines, Cosmetics & Medical Equipment Import |
|
Sept
2020 |
|
1-year |
|
In
process |
Ethiopia |
|
Quality
Medicines, Cosmetics & Medical Equipment Import |
|
Sept
2020 |
|
1-year |
|
In
process |
Uganda |
|
Quality
Medicines, Cosmetics & Medical Equipment Import |
|
Sept
2020 |
|
1-year |
|
Not
required |
Nigeria |
|
G-Systems
Limited |
|
Sept
2020 |
|
5-year |
|
Completed |
Togolese
Republic |
|
INVOSOLUX
TOGO |
|
Nov
2019 |
|
1-year |
|
In
process |
Iran |
|
Tasnim
Behboud |
|
Dec
2020 |
|
1-year |
|
Complete |
Sri
Lanka |
|
Alsonic
Limited |
|
July
2021 |
|
1-year |
|
In
process |
|
(a) |
Our
Mexico JV. Please note that the registration is temporarily in the name of Proveedora de Equipos y Productos, S.A. de C.V. and will
be transferred to Positib Fertility as soon as practicable. |
Investment
in Joint Ventures and Partnerships
As
part of our commercialization strategy, we entered into a number of joint ventures and partnerships designed to establish new INVO Centers.
The
following table sets forth a list of our current joint venture arrangements:
Affiliate
Name | |
Country | | |
Percent
(%) Ownership | |
| |
| | |
| |
HRCFG
INVO, LLC | |
| United
States | | |
| 50 | % |
Bloom
Invo, LLC | |
| United
States | | |
| 40 | % |
Positib
Fertility, S.A. de C.V. | |
| Mexico | | |
| 33 | % |
SNS
MURNI INVO Bioscience Malaysia Sendirian Berhad | |
| Malaysia | | |
| 50 | % |
Ginekalix
INVO Bioscience LLC Skopje | |
| Republic
of North Macedonia | | |
| 50 | % |
The
following table sets forth a list of our current partnership arrangements:
Partner | |
Country | | |
Partnership
Split | |
Lyfe
Medical | |
| United
States | | |
| 40 | % |
Alabama
JV Agreement
On March 10, 2021, our wholly owned subsidiary, INVO
Centers, LLC (“INVO CTR”), entered into a limited liability company agreement with HRCFG, LLC (“HRCFG”) to form
a joint venture for the purpose of establishing an INVO Center in Birmingham, Alabama. The name of the joint venture LLC is HRCFG INVO,
LLC (the “Alabama JV”). The responsibilities of HRCFG’s principals include providing clinical practice expertise, performing
recruitment functions, providing all necessary training, and providing day-to-day management of the clinic. The responsibilities of INVO
CTR include providing certain funding to the Alabama JV and providing access to and being the exclusive provider of the
INVOcell to the Alabama JV. INVO CTR will also perform all required, industry-specific compliance and accreditation functions,
and product documentation for product registration.
The
Alabama JV opened to patients on August 9, 2021, and initial treatment cycles commenced in September 2021.
Georgia
JV Agreement
On June 28, 2021, INVO CTR entered into a
limited liability company agreement (the “Bloom Agreement”) with Bloom Fertility, LLC (“Bloom”) to establish
a joint venture entity, formed as “Bloom INVO LLC” (the “Georgia JV”), for the purposes of commercializing INVOcell,
and the related IVC procedure, through the establishment of an INVO Center (the “Atlanta Clinic”) in the Atlanta, Georgia
metropolitan area.
In consideration for INVO’s commitment
to contribute up to $800,000 within the 24-month period following execution of the Bloom Agreement to support the start-up operations
of the Georgia JV, the Georgia JV issued 800 of its units to INVO CTR and in consideration for Bloom’s commitment to contribute
physician services having an anticipated value of up to $1,200,000 over the course of a 24-month vesting period, the Georgia JV issued
1,200 of its units to Bloom.
The responsibilities of Bloom include providing
all medical services required for the operation of the Atlanta Clinic. The responsibilities of INVO CTR include providing certain funding
to the Georgia JV, lab services quality management, and providing access to and being the exclusive provider of the INVOcell to the Georgia
JV. INVO CTR will also perform all required, industry specific compliance and accreditation functions, and product documentation for
product registration.
The
Georgia JV opened to patients on September 7, 2021, and commenced initial treatment cycles in November 2021.
Mexico
JV Agreement
Effective
September 24, 2020, INVO CTR entered into a Pre-Incorporation and Shareholders Agreement with Francisco Arredondo, MD PLLC (“Arredondo”)
and Security Health LLC, a Texas limited liability company (“Ramirez”, and together with INVO CTR and Arredondo, the “Shareholders”)
under which the Shareholders will commercialize the IVC procedure and offer related medical treatments in Mexico. Each party owns one-third
of the Mexican incorporated company, Positib Fertility, S.A. de C.V. (the “Mexico JV”).
The
Mexico JV will operate in Monterrey, Nuevo Leon, Mexico and any other cities and places in Mexico as approved by the Mexico JV’s
board of directors and Shareholders. In addition, the Shareholders agreed that the Mexico JV will be our exclusive distributor in Mexico.
The Shareholders also agreed not to compete directly or indirectly with the Mexico JV in Mexico.
The
Mexico JV opened to patients on November 1, 2021, and commenced initial treatment cycles beginning in January 2022.
Malaysia
JV Agreement
On
November 23, 2020, we entered into a joint venture agreement with SNS Murni SDN BHD (“SNS Murni”), a company incorporated
in Malaysia, to establish an exclusive joint venture in Malaysia to (i) introduce, promote and market technologies related to the INVOcell
and IVC Procedure in dedicated government-owned fertility clinics in Malaysia, and (ii) establish INVO Centers in Malaysia. The
joint venture is co-managed and owned 50% by each of INVO Bioscience and SNS Murni. As of December 31, 2021, no joint venture entity
had been formed.
North
Macedonia JV Agreement
On
November 23, 2020, we entered into a joint venture agreement with Ginekaliks Dooel (“Ginekaliks”), a limited liability company
incorporated in the Republic of North Macedonia, to establish an exclusive joint venture to (i) commercialize, introduce, promote,
and market technologies related to the INVOcell and IVC procedure in the Republic of North Macedonia, and (ii) establish an INVO
Center. The joint venture will be co-managed and owned 50% by each of INVO and Ginekaliks. As of December 31, 2021, no joint venture
entity had been formed.
Lyfe
Medical Center I, LLC Partnership agreement
On
April 9, 2021, we entered into a partnership agreement (the “Lyfe Agreement”) with Lyfe Medical Center I, LLC (“Lyfe”)
in connection with Lyfe’s intention to establish an INVO Center in the Bay Area of California (the “Bay Area Clinic”).
Pursuant to the Lyfe Agreement, we will provide embryology laboratory services in connection with the IVC procedure and other fertility-related
treatments (the “Lab Services”) to be provided by Lyfe to its patients at the Bay Area Clinic. Under the terms of the Lyfe
Agreement, we will receive 40% of the net income received by the Bay Area Clinic for the performance of the Lab Services. As of December
31, 2021, the Bay Area Clinic was not yet operational.
Competition
The fertility treatment regimens that the INVOcell
and IVC procedure compete with when infertile people, in conjunction with their physician, are choosing the treatment method
include drug-only stimulation, IUI, and conventional IVF. The fertility industry is highly competitive and characterized by long-standing
well-entrenched procedures as well as technological improvements. Our INVOcell enables the first new advanced treatment alternative in
over forty years. We face competition from all ART practitioners and device manufacturers. To date, most advancements in the ART market
have been limited to incremental improvements to the various products designed to simply support conventional IVF.
Our
principal ART medical device competitor for INVOcell is an intrauterine device called AneVivo™, developed by Anecova, a Swiss life
sciences company. The principal difference between the INVOcell and AneVivo™ is its placement inside the woman’s uterus for
early embryo development. We believe that placing the device in the uterus may be more invasive and thus may increase the risk to patients
compared to the INVOcell, which is placed in the vaginal cavity. Currently, AneVivo™ has obtained a CE Mark, but has not received
FDA approval.
For
additional information about competition, see Risk Factors in Item 1A of this Annual Report on Form 10-K.
Government
Regulation
In
November 2015, FDA granted our petition for de novo classification of the INVOcell. The INVOcell is intended for use in preparing, holding,
and transferring human gametes or embryos during IVC procedure with or without intra-cytoplasmic sperm injection fertilization (“ICSI”).
The special controls include clinical and non-clinical performance testing, biocompatibility, sterility and shelf-life testing, and labeling.
These special controls also apply to competing products that seek 510(k) clearance under the classification regulation for IVC systems,
including our own 510(k) effort to expand the labeling on INVOcell from a 3-day incubation period to up to a 5-day incubation
period.
We
are subject to regulation in each of the foreign countries where our products are sold. Many of the regulations applicable to our products
in such countries are similar to those of the FDA. The national health or regulatory organizations of certain countries require that
our products be qualified before they can be marketed in those countries. Many of the countries we are targeting either do not have a
formal approval process of their own or will rely on either FDA clearance or the European approval, the CE mark – although many
of these countries do require specific registration processes in order to list the INVOcell and make it available for sale.
With
our CE marking, we have the necessary regulatory authority to distribute our product, after registration, in the European Economic Area
(i.e., Europe, Australia, and New Zealand). In addition, we will have the ability to market in various parts of the Middle East, Asia
and South America. Every country has different regulatory and registration requirements, and we have begun or completed registrations
in a number of countries. In general, we are registering the product based on the size of the market and our ability to service it given
our resources as well as based on interest received from, and the execution of, agreements with distribution and joint venture partners.
We may be subject to healthcare fraud, waste,
and abuse regulation and enforcement by the federal government and the governments in the states and foreign countries in which we might
conduct our business. The federal laws and many state laws generally apply only to entities or individuals that provide items or services
for which payment may be made under a government healthcare program. These include laws that prohibit:
● |
the payment or receipt
of anything of value in exchange for referrals of business (e.g. Anti-Kickback Statute (42 U.S.C. § 1320a-7b) (the “AKS”);
Civil Monetary Penalties Law (42 U.S.C. § 1320a-7a) (the “CMPL”); Ala. Code § 22-1-11(c)); |
● |
the presenting of a
false or fraudulent claim for payment by a government healthcare program, such as Medicare or Medicaid (e.g. False Claims
Act (31 U.S.C. §§ 3729 – 3733); Georgia State False Medicaid Claims Act (Ga. Code Ann. §§ 49-4-168 –
49-4-168.6)); and |
● |
the referral by certain
ordering licensed healthcare providers of certain healthcare items and services that are payable by a government healthcare program
to an entity in which the healthcare provider or his or her immediate family member has an investment or other financial relationship
(e.g. Section 1877 of the Social Security Act (42 U.S.C. § 1395nn), commonly referred to as the “Stark Law”;
Georgia Patient Self-Referral Act of 1993 (Ga. Code Ann. §§ 43-1B-1 – 43-1B-8)). |
These laws are subject to extensive and increasing
enforcement by numerous federal, state, and local government agencies including the Office of Inspector General, the Department of Justice,
the Centers for Medicare & Medicaid Services, and various state authorities. At present, the Company’s products and services
are not reimbursable under any government healthcare program. If, however, that changes in the future and it were determined that the
Company was not in compliance with these federal fraud, waste, and abuse laws, the Company would be subject to liability.
We are subject to the requirements of the Health
Insurance Portability and Accountability Act of 1996, the Health Information Technology for Economic and Clinical Health Act of 2009
(“HITECH Act”), and related implementing regulations (together, “HIPAA”). Under HIPAA, the Company must have
in place administrative, physical, and technical standards to guard against the misuse of individually identifiable health information.
In the ordinary course of our business as a Business Associate, and soon with INVO Centers, as a Covered Entity, we may use, collect,
and store sensitive data, including protected health information (“PHI”). We face risks relative to protecting this critical
information, including loss of access risk, inappropriate disclosure risk, inappropriate modification risk, and the risk of being unable
to adequately monitor our controls. Our information technology and infrastructure may be vulnerable to attacks by hackers or viruses
or breached due to employee error, malfeasance, or other disruptions. Failure to comply with HIPAA, including through a breach of PHI,
could result in penalties and sanctions, and materially harm our business.
For
additional information about government regulation applicable to our business, see Risk Factors in Item 1A.
Intellectual
Property
We
rely on a combination of patent, copyright, and trademark laws in the United States and other countries to obtain and maintain our intellectual
property. We protect our intellectual property by, among other methods, filing patent applications with the U.S. Patent and Trademark
Office and its foreign counterparts on inventions that are important to the development of our business.
Our product development process has resulted in
the development of one (1) patent currently live and in good standing covering the INVOcell device, which is set to expire on July 14,
2024 (US Pat. No. 7,759,115). We completed a redesign of the INVOcell device as well as process improvements on the IVC procedure, which
supported a new patent application that was filed on November 11, 2020 and is currently pending. We also filed a PCT (Patent Cooperation
Treaty) application for the new U.S. application on January 18, 2021 to further expand patent protection in strategic locations across
the globe.
Our portfolio of U.S. registered trademarks includes:
● Registration Nos. 6146631 and 3757982
for INVOCELL
● Registration No. 4009827 for INVO
● Registration No. 4009828 for INVO BIOSCIENCE
We also have pending U.S. applications to register
the trademarks INVO CENTER (App. No. 88564596), and Life Begins Within (App. No. 90803801).
For additional information about our intellectual
property, see Risk Factors in Item 1A of this Annual Report on Form 10-K.
Available
Information
We
maintain an internet website at www.invobio.com. We make available, free of charge through our website, our annual report on Form 10-K,
current reports on Form 8-K, quarterly reports on Form 10-Q and each amendment to these reports. Each such report is posted on our website
as soon as reasonably practicable after such report is filed with the SEC via the EDGAR system.
The
information on our website is not incorporated by reference into this Annual Report on Form 10-K and should not be considered a part
of this Annual Report. Our website address is included in this Annual Report as an inactive textual reference only.
Item
1A. Risk Factors
You
should carefully consider the following risk factors, in addition to the other information in this report on Form 10-K, including the
section of this report titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
and our financial statements and related notes. If any of the events described in the following risk factors and the risks described
elsewhere in this report on Form 10-K occurs, our business, operating results and financial condition could be seriously harmed. This
report on Form 10-K also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially
from those anticipated in the forward-looking statements as a result of factors that are described below and elsewhere in this report.
The
following is a summary of certain important factors that may make an investment in our company speculative or risky. You should carefully
consider the full risk factor disclosure set forth in Item 1A of this Annual Report, in addition to the other information herein, including
the section of this report titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
and our financial statements and related notes.
|
● |
Our
business has posted net operating losses, has a limited operating history, and needs additional capital to grow and finance its operations.
|
|
● |
We
may require additional capital to continue as a going concern and to continue executing our business plan, which if not obtained
could result in a need to curtail operations. |
|
● |
Our existing INVO Centers were
established as joint ventures with medical partners. Future INVO Centers may also be established as joint ventures. These joint ventures
will be important to our business. If we are unable to maintain any of these joint ventures, or if they are not successful, our business
could be adversely affected. |
|
● |
Our
business is subject to significant competition. |
|
● |
We
are subject to risks associated with doing business globally. |
|
● |
We
need to manage growth in operations, and we may not be successful in implementing our growth strategy. |
|
● |
Our
products incorporate intellectual property rights developed by us that may be difficult to protect or may be found to infringe on
the rights of others. |
|
● |
We
may be forced to defend our intellectual property rights from infringement through expensive legal action. |
|
● |
We
face potential liability as a provider of a medical device. These risks may be heightened in the area of artificial reproduction. |
|
● |
We
may not be able to develop or continue our business if we fail to retain key personnel. |
|
● |
We
are subject to significant domestic and international governmental regulations. |
|
● |
The
FDA regulatory review process is expensive, time-consuming and uncertain, and the failure to obtain and maintain required regulatory
clearances and approvals could prevent us from commercializing our products. |
|
● |
We
are subject to continuing regulation by the FDA, and failure to comply may materially harm our business. |
|
● |
Our
products are generally subject to regulatory requirements in foreign countries in which we sell those products. We will be required
to expend significant resources to obtain regulatory approvals or clearances of our products, and there may be delays and uncertainty
in obtaining those approvals or clearances. |
|
● |
If
third-party payers do not provide adequate coverage and reimbursement for INVOcell and the IVC procedure, we may be unable to generate
significant revenues. |
|
● |
We are subject to risks relating
to federal and state healthcare fraud, waste, and abuse laws. |
|
● |
We are subject to requirements
of the Health Insurance Portability and Accountability Act of 1996, the Health Information Technology for Economic and Clinical Health
Act of 2009 (“HITECH Act”), and related implementing regulations (together, “HIPAA”), and failure to comply,
including through a breach of protected health information (“PHI”) could materially harm our business. |
|
● |
The
significant number of common shares registered for resale pursuant to the registration statement could adversely affect the trading
price of our common shares. |
|
● |
Our
shares of common stock are thinly traded, and the price may not reflect our value; there can be no assurance that there will be an
active market for our shares now or in the future. |
|
● |
Our
failure to meet the continued listing requirements of the Nasdaq Capital Market could result in a delisting of our common stock. |
|
● |
We
do not expect to pay any dividends to shareholders. |
|
● |
Our revenues and operating results
could fluctuate significantly from quarter to quarter, which may cause our stock price to decline. |
|
● |
We
may have difficulty raising the necessary capital to fund operations because of the thin market and market price volatility
for our shares of common stock. |
|
● |
Shareholders
may be diluted significantly through our efforts to obtain financing and from issuance of additional shares of our common stock,
including such issuances of shares for services. |
|
● |
Failure
to comply with internal control attestation requirements could lead to loss of public confidence in our financial statements and
negatively impact our stock price. |
Risks
Relating to Our Business
Our
business has posted net operating losses, has a limited operating history, and needs additional capital to grow and finance its operations.
From
the inception of our consolidated subsidiary BioXcell Inc. on January 5, 2007, through December 31, 2021, we had an accumulated
net loss of $38.9 million. We have a limited operating history and are essentially an early-stage operation. We will continue
to be dependent on having access to additional new capital or generating positive operating cash flow primarily through increased device
sales and the development of our INVO Centers in order to finance the growth of our operations. Continued net operating losses together
with limited working capital make investing in our common stock a high-risk proposal. Our limited operating history may make it difficult
for management to provide effective insight into future activities, marketing costs, and customer acquisition and retention. This could
lead to INVO missing targets for the achievement of profitability, which could negatively affect the value of your investment.
We
may require additional capital to continue as a going concern and to continue executing our business plan, which if not obtained could
result in a need to curtail operations.
As
reflected in the accompanying financial statements for the year ended December 31, 2021, we continue to make progress toward commercialization
of our INVOcell and the development of our INVO Centers, although revenue is not yet sufficient to cover our current operations.
Longer term, based on our projected cash needs, we will be dependent on generating sufficient sales, entering into new distribution agreements,
the profitability of our INVO Centers, and/or raising additional debt or equity capital to support our operations. No assurance can be
given that we will be successful in raising capital in the amounts or at the rates required to continue operations, or that such capital,
if available, will be available on terms acceptable to us. If we are not able to raise additional capital at the rate and in the amounts
needed, our business may be significantly impacted, which could materially adversely affect the value of your investment.
Our existing INVO Centers were established as joint ventures with
medical partners. Future INVO Centers may also be established as joint ventures. These joint ventures will be important to our business.
If we are unable to maintain any of these joint ventures, or if they are not successful, our business could be adversely affected.
We
have established, and plan to establish additional, entered into, and may enter into additional, joint ventures for the operation of
our INVO Centers. Our existing and any future joint ventures may have a number of risks, including that our joint venture partners:
| ● | have
significant discretion in determining the efforts and resources that they will apply; |
| ● | may
not perform their obligations as expected; |
| ● | may
dispute the amounts of payments owed; |
| ● | may
fail to comply with applicable legal and regulatory requirements regarding the distribution or marketing of
our INVOcell product; |
| ● | may
not properly maintain or defend their or our relevant intellectual property rights or may use our proprietary
information in such a way as to invite litigation that could jeopardize or invalidate our intellectual property
or proprietary information or expose us to potential litigation and liability; |
| ● | may
infringe the intellectual property rights of third parties, which may expose us to litigation and potential
liability; |
| ● | could
become involved in a business combination or cessation that could cause them to deemphasize or terminate the
development or commercialization of our INVOcell product; and |
| ● | may
seek to terminate our joint venture, which could require us to raise additional capital and to develop new joint
venture relationships. |
Additionally,
if one of our joint venture partners seeks to terminate its agreement with us, we may find it difficult to attract new joint venture
partners and the perception of our INVO Centers in the business and financial communities could be adversely affected.
Our
business is subject to significant competition.
The
fertility industry is highly competitive and characterized by well entrenched and long-standing practices as well as technological improvements
and advancements. New ART services, devices and techniques may be developed that may render the INVOcell obsolete. Competition in the
areas of fertility and ART services is largely based on pregnancy rates and other patient outcomes. Accordingly, the ability of our business
to compete is largely dependent on our ability to achieve adequate pregnancy rates and patient satisfaction levels. Our business operates
in highly competitive areas that are subject to change. New health care providers and medical technology companies entering the market
may reduce our and our INVO Centers’ market share, patient volume and growth rates, and could force us to alter our planned pricing
and INVO Center service offerings. Additionally, increased competitive pressures may require us to commit more resources to our and our
INVO Centers’ marketing efforts, thereby increasing our cost structure and affecting our ability to achieve, or the timing of achieving,
profitability. There can be no assurance that we will not be able to compete effectively, nor can there be any assurance that
additional competitors will not enter the market. Such competition may make it more difficult for us to enter into additional contracts
with fertility clinics or open profitable INVO Centers.
We
are subject to risks associated with doing business globally.
Our
operations, both inside and outside the United States, are subject to risks inherent in conducting business globally and under the laws,
regulations and customs of various jurisdictions and geographies. Our operations outside the United States are subject to special risks
and restrictions, including, without limitation: fluctuations in currency values and foreign-currency exchange rates; exchange control
regulations; changes in local political or economic conditions; governmental pricing directives; import and trade restrictions; import
or export licensing requirements and trade policy; restrictions on the ability to repatriate funds; and other potentially detrimental
domestic and foreign governmental practices or policies affecting U.S. companies doing business abroad, including the U.S. Foreign Corrupt
Practices Act and the trade sanctions laws and regulations administered by the U.S. Department of the Treasury’s Office of Foreign
Assets Control. Acts of terror or war may impair our ability to operate in particular countries or regions and may impede the
flow of goods and services between countries. Customers in weakened economies may be unable to purchase our products, or it could become
more expensive for them to purchase imported products in their local currency, or sell at competitive prices, and we may be unable to
collect receivables from such customers. Further, changes in exchange rates may affect our net earnings, the book value of our assets
outside the United States and our stockholders’ equity. Failure to comply with the laws and regulations that affect our global
operations could have an adverse effect on our business, financial condition or results of operations.
Failure
to comply with the United States Foreign Corrupt Practices Act or similar laws could subject us to penalties and other adverse consequences.
We
are subject to the United States Foreign Corrupt Practices Act, which generally prohibits United States companies, including their suppliers,
distributors and other commercial partners, from engaging in bribery or other prohibited payments to foreign officials for the purpose
of obtaining or retaining business. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices occur from time-to-time
in the countries in which we distribute products. We have adopted formal policies and procedures designed to facilitate compliance with
these laws. If our employees or other agents, including our distributors or suppliers, are found to have engaged in such practices, we
could suffer severe penalties and other consequences that may have a material adverse effect on our business, financial condition and
results of operations.
We
need to manage growth in operations, and we may not be successful in implementing our growth strategy.
In
order to maximize potential growth in our current and potential markets, we may need to expand the scope of our services in the medical
device/bioscience industry. We continue to seek additional market strategies to increase the adoption of INVOcell, including the establishment
of stand-alone INVO Centers and our efforts to bring the INVOCell and IVC procedure into the existing OB/GYN infrastructure. Such expansion
will place a significant strain on our management, operational and sales systems. As a result, we plan to continue to improve our INVOcell
technology, operating procedures and management information systems. We will also need to effectively train, motivate and manage our
employees. Our failure to manage our growth could disrupt our operations and ultimately prevent us from generating revenues at the levels
we expect.
Many
factors including, but not limited to, increased competition from similar businesses, unexpected costs, costs associated with marketing
efforts and maintaining a strong client base may interfere with our ability to expand successfully. Our inability to implement our internal
strategy successfully may have a negative impact on our growth, future financial condition, results of operations and/or cash flows.
Our
products incorporate intellectual property rights developed by us that may be difficult to protect or may be found to infringe on the
rights of others.
While
we currently own U.S. and international patents, these patents may be challenged, invalidated or circumvented, and will ultimately expire.
In addition, the rights granted under these patents may not provide the competitive advantages we currently anticipate. Certain countries,
including the United States and in Europe, could place restrictions on the patentability of various medical devices which may materially
affect our business and competitive position. Additionally, the laws of some foreign countries, in particular China and India, do not
protect our proprietary rights to the same extent or in the same manner as U.S. laws, and we may encounter significant problems in protecting
and defending our proprietary rights in these countries. In addition to relying on patent, copyright and trademark laws, we also utilize
a combination of trade secrets, confidentiality policies, non-disclosure and other contractual arrangements to protect our intellectual
property rights. However, these measures may not be adequate to prevent or deter infringement or other misappropriation. Further, our
intellectual property rights may be found to infringe on intellectual property rights of third parties. Moreover, we may not be able
to detect unauthorized use or take appropriate and timely steps to establish and enforce our proprietary rights. Existing laws of some
countries in which we conduct business offer only limited protection of our intellectual property rights, if at all. As the number of
market entrants as well as the complexity of technology in the fertility marketplace increases, the possibility of functional overlap
and inadvertent infringement of intellectual property rights also increases.
We
may be forced to defend our intellectual property rights from infringement through expensive legal action.
Third
parties may in the future assert claims against us alleging infringement on their intellectual property rights. Defending such claims
may be expensive, time consuming and divert the efforts of our management and/or technical personnel. Because of litigation, we could
be required to pay damages and other compensation, develop non-infringing products or enter into royalty and/or licensing agreements.
However, we cannot be certain that any such licenses, will be made available to us on commercially reasonable terms.
We
regard our trade secrets, patents and similar intellectual property as critical to our successful operations. To protect our proprietary
rights, we rely on intellectual property and trade secret laws, as well as confidentiality and license agreements with certain employees,
customers and third parties. No assurance can be given that our intellectual property will not be challenged, invalidated, infringed
or circumvented. If necessary, we intend to defend our intellectual property rights from infringement through legal action, which could
be very costly and could adversely affect our ability to achieve and maintain profitability. Our limited capital resources could put
us at a disadvantage if we are required to take legal action to enforce our intellectual property rights.
We
face potential liability as a provider of a medical device. These risks may be heightened in the area of artificial reproduction.
The
provision of medical devices entails the substantial risk of potential tort injury claims. We do not engage in the practice of medicine
or assume responsibility for compliance with regulatory requirements directly applicable to physicians. We currently utilize product
liability insurance to provide coverage against potential tort injury claims, as well as customary insurance protection for our INVO
Centers. However, there can be no assurance such coverage will provide adequate protection against any potential claims. Furthermore,
any claim asserted against us could generate costly legal fees, consume management’s time and resources, and adversely affect our
reputation and business, regardless of the merit or eventual outcome of such claim.
There
are inherent risks specific to the provision of fertility and ART services. For example, the long-term effects on women of the administration
of fertility medication, integral to most fertility and ART services, are of concern to certain physicians and others who fear the medication
may prove to be carcinogenic or cause other medical problems. Additionally, any ban or other limitation imposed by the FDA or other foreign
regulatory department on fertility medication and services could have a material adverse effect on our business. Any such action would
likely adversely affect the value of your investment.
If
we fail to maintain adequate quality standards for our products, our reputation and business may be adversely affected and harmed.
Our
customers are expecting that our products will perform as marketed and in accordance with industrial standards. We rely on third-party
manufacturing companies and their packaging processes in connection with the production of our products. A failure to maintain product
quality standards in accordance with our customer’s expectations could result in the loss of demand for our products. Additionally,
delays or quality lapses in our production lines could result in substantial economic losses to us. Although we believe that our current
quality control procedures adequately address these risks, there can be no assurance that we will not experience occasional or systemic
quality lapses in our manufacturing and service operations. Currently, we have limited manufacturing capabilities as we rely on a single
manufacturing provider regarding our production process. In the event our manufacturer is unable to produce an adequate supply of products
at appropriate quality levels, our growth could be limited, and our business may be harmed. If we experience significant or prolonged
disturbance in our quality standards, our business and reputation may be harmed, which may result in the loss of customers, our inability
to participate in future customer product opportunities and reduced revenue and earnings.
We
heavily rely on third party package delivery services, and a significant disruption in these services or significant increases in prices
may disrupt our ability to import or export materials, increase our costs and negatively affect our ability to achieve and maintain profitability.
We
ship a significant portion of our products to our customers through independent package delivery companies. If any of our key third party
package delivery providers experience a significant disruption such that any of our products, components or raw materials cannot be delivered
in a timely fashion or such that we incur additional shipping costs that we are unable to recoup, our costs may increase and our relationships
with certain customers may be adversely affected. In particular, if our third-party package delivery providers increase prices and we
are not able to find comparable alternatives or adjust our delivery network, our profitability could be adversely affected.
We
may not be able to develop or continue our business if we fail to retain key personnel.
We
substantially rely upon the efforts and abilities of our executive management and directors. The loss of any of our executive officers
and/or directors services could potentially have a material adverse effect on our business, operations, revenues and/or prospects. If
one or more of these persons were to become unable or unwilling to continue in their present positions, we may not be able to replace
them readily or timely, if at all. We do not maintain key man life insurance on the lives of any of our executive management or directors.
We
will need additional, qualified personnel in order to expand our business. Without additional personnel, we will not be able to expand
our business.
Expanding
our business requires increasing the number of persons engaged in activities for the sale, marketing, administration and delivery of
our products as well as clinical training personnel for proper IVC procedure training . Our ability to attract and hire personnel to
fulfil these efforts is dependent on our ability to attract and retain potential employees with the proper background and training matching
the skills required for the positions. In addition, we may not be able to attract personnel who will be able to successfully implement
our business operations and growth strategy in the manner that we currently anticipate.
Currency
exchange rate fluctuations may affect the results of our operations.
We
intend to distribute our INVOcell product internationally with all sales, domestic and international, in U.S. dollars. As a result, our
operations could be impacted by fluctuations in currency exchange rates, although we attempt to mitigate such risk by invoicing only
in U.S. dollars. In spite of this, our operations may still be negatively impacted by foreign currency exchange rates in the event the
U.S. dollar strengthens and the local currency where the product is being sold weakens. In the event such international patients are
unable to afford the associated increase costs, international doctors and clinics may not be able to offer the INVOcell and IVC procedure.
As we expand our international footprint with joint ventures, these joint ventures will likely have a functional currency based on their
location and as a result, if we are required to consolidate these financial results it may create currency fluctuations. Additionally,
as an international business we may be susceptible to adverse foreign currency fluctuations unconnected to the U.S. dollar.
We
are subject to risks in connection with changes in international, national and local economic and market conditions.
Our
business is subject to risks in connection with changes in international, national and local economic and market conditions, including
the effects of global financial crises, effects of terrorist acts, war and global pandemics. Such economic changes could negatively impact
infertile people’s ability to pay for fertility treatment around the world.
We
anticipate that eventually international sales will account for a meaningful part of our revenue. We will experience additional risks
associated with international sales, including:
● |
political
and economic instability; |
● |
export
controls; |
● |
changes
in international legal and regulatory requirements; |
● |
United
States and foreign government policy changes affecting the product marketability; and |
● |
changes
in tax laws, duties and tariffs. |
Any
of these factors could have a material adverse effect on our business, results of operations and financial condition. From 2011 through
2021, we sold products in certain international markets mainly through independent distributors, and we anticipate maintaining a similar
sales strategy along with our recent joint venture activity for the foreseeable future. In the event a distributor fails to meet annual
sales goals, we may be required to obtain a replacement distributor, which may be costly and difficult to identify. Additionally, a change
in our distributors may increase costs, and create a substantial disruption in our operations resulting loss of revenue.
We
can no longer depend on minimum annual product purchases from Ferring.
On
November 2, 2021, Ferring International Center S.A. (“Ferring”) notified us of their intent to terminate the U.S. Distribution
Agreement (the “Ferring Agreement”), pursuant to which we granted Ferring certain rights to sell our products in the United
States market. Ferring gave notice of termination for convenience under Section 14.2(b) of the Ferring Agreement which required 90-days
prior written notice. Accordingly, the Ferring Agreement officially terminated on January 31, 2022. By its terms, our Supply Agreement
with Ferring also terminated on such date. Under the terms of these agreements, Ferring was required to make certain minimum annual purchases
to maintain U.S. exclusivity for the INVOcell. Such purchases are no longer available now that the Ferring Agreement has been terminated.
Ferring’s termination of these agreements could have a material adverse effect on our business, financial condition and results
of operations.
Risks
Related to Our Industry
We
are subject to significant domestic and international governmental regulation.
Our
business is heavily regulated domestically in the United States and internationally. In the United States the FDA, and other federal,
state and local authorities, implement various regulations that subject us to civil and criminal penalties, including cessation of operations
and recall of products distributed, in the event we fail to comply. Any such actions could severely curtail our sales and
business reputation. In addition, additional restrictive laws, regulations or interpretations could be adopted, making compliance with
such regulations more difficult or expensive. While we devote substantial resources to ensure our compliance with laws and regulations,
we cannot completely eliminate the risk that we may be found non-compliant with applicable legal and regulatory requirements.
We
believe that the healthcare industry will continue to be subject to increased regulation as well as political and legal action, as future
proposals to reform the health care system are considered by the U.S. Congress and state legislatures. We do not know of, nor do we have
any control over, future changes to health care laws and regulations which may have a significant impact on our business.
The
FDA regulatory review process for medical devices is expensive, time-consuming and uncertain, and the failure to obtain and maintain
required regulatory clearances and approvals could prevent us from commercializing our products.
Unless
an exemption applies, each medical device commercially distributed in the United States requires either FDA clearance of a 510(k) premarket
notification, approval of a premarket approval, or issuance of a de novo classification order. The FDA clearance, de novo classification,
and approval processes for medical devices are expensive, uncertain and time-consuming.
Future
modifications to the INVOcell that was classified through de novo may require a 510(k) clearance. We may make minor changes to
the INVOcell without seeking clearance for the modifications if we determine such clearances are not necessary and document the basis
for that conclusion. However, the FDA may disagree with our determination or may require additional information, including clinical data,
to be submitted before a determination is made, in which case we may be required to delay the introduction and marketing of our modified
products, redesign our products, conduct clinical trials to support any modifications, or we may be subject to enforcement actions. In
addition, the FDA may not clear such modified INVOcell for the indications that are necessary or desirable for successful commercialization.
There
is no assurance that we will be able to obtain the necessary clearances on a timely basis or at all. Further, the FDA may change its
policies, adopt additional regulations or revise existing regulations, or take other actions which may impact our ability to modify the
INVOcell on a timely basis, and may prevent or delay clearance of future products. Delays in receipt of, or failure to obtain clearances
for any product modifications or future products we may develop would result in delayed or no realization of revenue from such products
and the viability of our INVO Centers, and in substantial additional costs, which could decrease our profitability.
In
addition, we are required to continue to comply with applicable FDA and other regulatory requirements following de novo classification
or clearance. The failure to comply with existing or future regulatory requirements could have a material adverse effect on our business.
Improper
marketing and promotion or off-label use of our product could lead to investigations and enforcement by governmental bodies including
product recalls or market withdrawal, may harm our reputation and business, and could result in product liability suits.
If
the FDA or any foreign regulatory entity determines that our promotional materials or training constitute promotion of an off-label use,
it could request that we modify our training or promotional materials or subject us to regulatory or enforcement actions. These enforcement
actions could include, for example, a warning letter or untitled letter, injunction, seizure, civil fine or criminal penalties. We cannot,
however, prevent a physician from using the INVOcell off-label, when in the physician’s independent professional medical judgement,
he or she deems it appropriate. There may be increased risk of injury to patients if physicians attempt to use the INVOcell off-label,
or the INVOcell may not be as effective, which could harm our reputation.
If
we fail to comply with the FDA’s Quality System Regulation (“QSR”) or comparable EU requirements, the
FDA or EU competent authorities could take various enforcement actions, including suspending our FDA clearance to market, withdrawal
of our EU CE Certificate or halting our manufacturing operations, and our business would suffer.
In
the United States, as a manufacturer of a medical device, we are required to demonstrate and maintain compliance with the FDA’s
QSR. The QSR covers the methods and documentation of the design, testing, control, manufacturing, labeling, quality assurance, packaging,
storage and distribution of medical devices. The FDA enforces the QSR through periodic inspections and unannounced “for
cause” inspections. Outside the United States, our products and operations are also required to comply with national requirements
where the product is sold and also standards set by industrial standards bodies, such as the International Organization for Standardization.
Foreign regulatory bodies may evaluate our products or the testing that our products undergo against these standards. The specific standards,
types of evaluation and scope of review differ among foreign regulatory bodies. Our failure to comply with FDA or foreign regulatory
agency requirements, or failure to take satisfactory and prompt corrective action in response to an adverse inspection, could result
in enforcement actions, including a warning letter, adverse publicity, a shutdown of or restrictions on our manufacturing operations,
a recall or seizure of our products, fines, injunctions, civil or criminal penalties, or other sanctions, any of which could cause our
business and operating results to suffer.
We
are subject to continuing regulation by the FDA, and failure to comply may materially harm our business.
We
are subject to Medical Device Reporting (“MDR”) regulations, which require us to report to the FDA if we become aware of
information that reasonably suggests our product may have caused or contributed to a death or serious injury or has malfunctioned and
the device or a similar device we market would likely cause or contribute to a death or serious injury if the malfunction were to recur.
We may fail to report adverse events of which we become aware within the prescribed timeframe. We may also fail to recognize that we
have become aware of a reportable adverse event. If we fail to comply with our medical device reporting obligations, the FDA could issue
warning letters or untitled letters, take administrative actions, commence criminal prosecution, impose civil monetary penalties, request
or require a product recall, seize our products, or delay the clearance of our future products. We must report corrections and removals
to the FDA where the correction or removal was initiated to reduce a risk to health posed by the device or to remedy a violation of the
Federal Food, Drug, and Cosmetic Act, or FDCA, caused by the device that may present a risk to health.
Our
failure to comply with these or other applicable regulatory requirements could result in enforcement actions by the FDA which may include
untitled letters, warning letters, fines, injunctions, consent decrees and civil penalties; customer notifications or repair, replacement
or refunds; and criminal prosecution.
Our
products are generally subject to regulatory requirements in foreign countries in which we sell those products. We will be required to
expend significant resources to obtain regulatory approvals or clearances of our products, and there may be delays and uncertainty in
obtaining those approvals or clearances.
In
order to sell our products in foreign countries, generally we must obtain regulatory approvals and comply with the regulations of those
countries. These regulations, including the requirements for approvals or clearances and the time required for regulatory review, vary
from country-to-country.
The
EU requires that manufacturers certify compliance of medical devices with Council Directive (93/42/EEC) (“MDD”), as amended,
and affix the CE mark before selling such devices in member countries of the EU or European Economic Area (“EEA”). The CE
mark is an international symbol of adherence to quality assurance standards and compliance with applicable European medical device directives.
In order to obtain the authorization to affix the CE mark to products, a manufacturer must certify that its product complies with the
applicable directive, which may include a requirement to obtain certification that its processes and products meet certain European quality
standards.
In
May 2017, the EU adopted Regulation (EU) 2017/745 (“MDR”), which will repeal and replace the MDD with effect from May 26,
2021. Under transitional provisions, medical devices with notified body certificates issued under the MDD prior to May 26, 2021,
may continue to be placed on the market for the remaining validity of the certificate, until May 27, 2024, at the latest as
long as there have been no significant changes made to the product. After the expiry of any applicable transitional period, only
devices that have been CE marked under the MDR may be placed on the market in the EU (or EEA). The MDR includes increasingly stringent
requirements in multiple areas, such as pre-market clinical evidence (some of which are now in effect), review of high-risk devices,
labeling and post-market surveillance. Under the MDR, pre-market clinical data will now be required to obtain CE Mark approval for high-risk,
new and modified medical devices. We believe these new requirements have the potential to be expensive and time-consuming to implement
and maintain.
Complying
with and obtaining regulatory approval in foreign countries, including compliance with the MDR, have caused and will likely continue
to cause us to experience more uncertainty, risk, expense and delay in commercializing products in certain foreign jurisdictions, which
could have a material adverse impact on our net sales, market share and operating profits from our international operations.
Our
planned additional clinical trial and 510(k) efforts may prove unsuccessful.
We
intend to pursue our label expansion effort and corresponding 510(k) submission utilizing real-market usage (retrospective) data. We
may also conduct an additional prospective clinical trial related to the expansion of INVOcell’s indications to include 5-day incubation.
While we anticipate a positive outcome of this effort, an unsuccessful trial or insufficient retrospective data could adversely impact
our ability to receive FDA clearance for the particular indication related to 5-day incubation and impact our ability to expand our marketing
efforts.
Changes
in the healthcare industry may require us to decrease the selling price for our products or could result in a reduction in the available
market size.
Governmental
and private sector initiatives in the U.S. and abroad involving trends toward managed healthcare and cost containment could place an
emphasis on our ability to deliver more cost-effective medical therapies. The development of other cost-effective devices could eventually
adversely affect the prices and/or sales of our products. Companies in the healthcare industry are subject to various existing and proposed
laws and regulations, in both domestic and international markets, regulating healthcare pricing and profitability. Additionally, there
have been third-party payer initiatives to challenge the prices associated with medical products, which if successful, could affect our
ability to sell products on a competitive basis in the future.
In
the United States, there has been a trend of consolidation among healthcare facilities and purchasers of medical devices, allowing such
purchasers to limit the number of suppliers from whom they purchase medical products. As result, it is unknown whether such purchasers
will decide to stop purchasing our products or demand discounts on our prices. Any pressure to reduce our product prices in response
to these industry trends and the decrease in market size could adversely affect our anticipated revenue and profitability of our sales,
creating a material adverse effect on our business.
If
third-party payers do not provide adequate coverage and reimbursement for INVOcell and the IVC procedure, we may be unable to generate
significant revenues.
Our
success in marketing and commercializing INVOcell and the IVC procedure may depend in part on whether private health insurers and other
payer organizations provide adequate coverage and reimbursement. If physicians or insurers do not find our clinical data compelling or
wish to wait for additional studies, they may choose not to use or provide coverage and reimbursement for INVOcell and the IVC procedure.
We cannot provide assurance that data we or others may generate in the future will be consistent with that observed in our existing clinical
studies, or that our current or future published clinical evidence will be sufficient to obtain adequate coverage and reimbursement for
our products. Moreover, if we cannot obtain adequate coverage for and reimbursement of the cost of our products, we cannot provide assurance
that patients will be willing to incur the full cost of INVOcell and the IVC procedure.
Third-party
payers, whether foreign or domestic, or governmental or commercial, are developing increasingly sophisticated methods of controlling
healthcare costs. In addition, in the United States, no uniform policy of coverage and reimbursement for INVOcell and the procedure exists
among third-party payers. Therefore, coverage and reimbursement for INVOcell and the IVC procedure may differ significantly from payer
to payer. In addition, payers continually review new technologies for possible coverage and can, without notice, deny coverage for these
new products and procedures. As a result, the coverage determination process is often a time-consuming and costly process that will require
us to provide scientific and clinical support for the use of INVOcell and the IVC procedure to each payer separately, with no assurance
that coverage and adequate reimbursement will be obtained or maintained if obtained.
Reimbursement
systems in international markets vary significantly by country and by region within some countries, and reimbursement approvals must
be obtained on a country-by-country basis. In many international markets, a product must be approved for reimbursement before it can
be approved for sale in that country. Further, many international markets have government-managed healthcare systems that control reimbursement
for new devices and procedures. In most markets, there are private insurance systems as well as government-managed systems. If sufficient
and timely coverage and reimbursement is not available for our current or future products, in either the United States or internationally,
the demand for our products and our revenues may be adversely affected.
We
are subject to risks relating to federal and state healthcare fraud, waste, and abuse laws.
We
may be subject to healthcare fraud, waste, and abuse regulation and enforcement by the federal government and the governments in the
states and foreign countries in which we might conduct our business. Such federal laws generally apply only to entities or individuals
that provide items or services for which payment may be made under a federal healthcare program. These laws are subject to extensive
and increasing enforcement by numerous federal, state, and local government agencies including the Office of Inspector General, the Department
of Justice, the Centers for Medicare & Medicaid Services, and various state authorities. The healthcare laws and regulations that
may affect our ability to operate include the following:
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The federal Anti-Kickback
Statute (42 U.S.C. § 1320a-7b) (the “AKS”), a criminal statute, makes it illegal for any person or entity to knowingly
and willfully, directly or indirectly, solicit, receive, offer, or pay any remuneration that is in exchange for or to induce the
referral of business, including the purchase, order, lease of any good, facility, item, or service for which payment may be made
under a federal healthcare program, such as Medicare or Medicaid. The term “remuneration” has been broadly interpreted
to include anything of value. The Civil Monetary Penalties Law (42 U.S.C. § 1320a-7a) (the “CMPL”) also contains
a provision that prohibits the payment of anything of value in return for referrals and provides for the imposition of civil penalties. |
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Federal false claims
and false statement laws, including the federal civil False Claims Act (31 U.S.C. §§ 3729 – 3733), prohibits, among
other things, any person or entity from knowingly presenting, or causing to be presented, for payment to, or approval by, federal
programs, including Medicare and Medicaid, claims for items or services that are false or fraudulent. |
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Section 1877 of the
Social Security Act (42 U.S.C. § 1395nn), commonly referred to as the “Stark Law, prohibits referrals by ordering by a
physician of “designated health services,” which include durable medical equipment and supplies as well as inpatient
and outpatient hospital services, that are payable, in whole or in part, by Medicare or Medicaid, to an entity in which the physician
or the physician’s immediate family member has an investment interest or other financial relationship, subject to several exceptions.
Financial relationships that are implicated by the Stark Law can include arrangements ranging from marketing arrangements and consulting
agreements to medical director agreements with physicians who order our products. The Stark Law also prohibits billing for services
rendered pursuant to a prohibited referral. Several states have enacted laws similar to the Stark Law. These state laws may cover
all (not just Medicare and Medicaid) patients. Many federal healthcare reform proposals in the past few years have attempted to expand
the Stark Law to cover all patients as well. If we violate the Stark Law, our financial results and operations could be adversely
affected. Penalties for violations include denial of payment for the services, significant civil monetary penalties, and exclusion
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The federal Physician
Payments Sunshine Act (42 U.S.C. § 1320a–7h) requires certain manufacturers of drugs, devices, biologics and medical supplies
for which payment is available under Medicare, Medicaid or the Children’s Health Insurance Program, with specific exceptions,
to report annually to the Centers for Medicare & Medicaid Services information related to payments or other transfers of value
made to physicians and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate family
members. |
At
present, our products and services are not reimbursable under any federal healthcare program. If, however, that changes in the future
and it were determined that we were not in compliance with these federal fraud, waste, and abuse laws, we would be subject to liability.
Also,
as noted above, many states have similar laws and regulations, such as anti-kickback and false claims laws that may be broader in scope
and may apply regardless of payor, in addition to items and services reimbursed under Medicaid and other state programs. We may be subject
to such laws in Alabama and Georgia due to our joint venture operations in those states. The Georgia State False Medicaid Claims Act
(Ga. Code Ann. §§ 49-4-168 – 49-4-168.6), Georgia Medical Assistance Act false statements provision (Ga. Code Ann. §§
49-4-140 – 49-4-157), and Alabama Medicaid false statements statute (Ala. Code § 22-1-11(a)) contain prohibitions that are
analogous to the federal False Claims Act. Alabama law also includes an anti-kickback provision (Ala. Code § 22-1-11(c)) that is
analogous to the federal AKS.
The
Georgia Patient Self-Referral Act of 1993 (Ga. Code Ann. §§ 43-1B-1 – 43-1B-8) contains prohibitions on self-referral
that are similar to those under the Stark Law, however, the Georgia law applies to additional classes of providers, including pharmacists,
and is not limited to items or services reimbursable by a federal healthcare program. The Georgia law prohibits health care providers
or entities regulated by the law from presenting any claim for payment to any individual, third-party payer, or other entity for a service
furnished pursuant to a prohibited referral.
If
we are found in violation of applicable laws or regulations, we could suffer severe consequences that would have a material adverse effect
on our business, results of operations, financial condition, cash flows, reputation and stock price, including:
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suspension or termination
of our participation in federal healthcare programs; |
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criminal or civil liability,
fines, damages or monetary penalties for violations of healthcare fraud and abuse laws, including the federal False Claims Act, CMPL,
and AKS; |
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repayment of amounts
received in violation of law or applicable payment program requirements, and related monetary penalties; |
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mandated changes to
our practices or procedures that materially increase operating expenses; |
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imposition of corporate
integrity agreements that could subject us to ongoing audits and reporting requirements as well as increased scrutiny of our business
practices; |
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termination of various
relationships or contracts related to our business; and |
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harm to our reputation
which could negatively affect our business relationships, decrease our ability to attract or retain patients and physicians, decrease
access to new business opportunities and impact our ability to obtain financing, among other things. |
Responding
to lawsuits and other proceedings as well as defending ourselves in such matters would require management’s attention and cause
us to incur significant legal expense. It is also possible that criminal proceedings may be initiated against us or individuals in our
business in connection with investigations by the federal government.
Additionally,
to the extent that our product is sold or our services are provided in a foreign country, we may be subject to similar foreign laws.
We
are subject to the requirements of the Health Insurance Portability and Accountability Act of 1996, the Health Information Technology
for Economic and Clinical Health Act of 2009 (“HITECH Act”), and related implementing regulations (together, “HIPAA”),
and failure to comply, including through a breach of protected health information (“PHI”) could materially harm our business.
HIPAA
established comprehensive federal protection for the privacy and security of health information. The HIPAA standards apply to three types
of organizations, or “Covered Entities”: (1) health plans, (2) health care clearing houses, and (3) health care providers
who conduct certain health care transactions electronically. The HIPAA standards also apply to Covered Entities’ “Business
Associates.” Covered Entities and their Business Associates must have in place administrative, physical, and technical standards
to guard against the misuse of individually identifiable health information. The HITECH Act promotes the adoption and meaningful use
of health information technology. The HITECH Act addresses the privacy and security concerns associated with the electronic transmission
of health information, in part, through several provisions that strengthen the civil and criminal enforcement of the HIPAA rules. These
laws may impact our business in the future. INVO is currently a Business Associate of various Covered Entities. Failure to comply with
these confidentiality requirements, including via a breach of PHI, may result in penalties and sanctions.
In
the ordinary course of our business, we may use, collect, and store sensitive data, including PHI. We face risks relative to protecting
this critical information, including loss of access risk, inappropriate disclosure risk, inappropriate modification risk, and the risk
of being unable to adequately monitor our controls. Our information technology and infrastructure may be vulnerable to attacks by hackers
or viruses or breached due to employee error, malfeasance or other disruptions. Any such breach or interruption could compromise our
networks and the information stored there could be accessed by unauthorized parties, publicly disclosed, lost or stolen. Any such access,
disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of
personal information, such as HIPAA, and regulatory penalties. There is no guarantee that we can continue to protect our systems from
breach. Unauthorized access, loss, or dissemination could also disrupt our operations.
The
U.S. Office of Civil Rights in the Department of Health and Human Services enforces the HIPAA privacy and security rules and may impose
penalties for failure to comply with requirements of HIPAA. Penalties vary significantly depending on factors such as whether failure
to comply was due to willful neglect. These penalties include civil monetary penalties of $100 to $50,000 per violation, up to an annual
cap of $1,500,000 for identical violations. A person who knowingly obtains or discloses individually identifiable health information
in violation of HIPAA may face a criminal penalty of up to $50,000 per violation and up to one-year imprisonment. The criminal penalties
increase to $100,000 per violation and up to five-years imprisonment if the wrongful conduct involves false pretenses, and to $250,000
per violation and up to 10-years imprisonment if the wrongful conduct involves the intent to sell, transfer, or use identifiable health
information for commercial advantage, personal gain, or malicious harm. The U.S. Department of Justice is responsible for criminal prosecutions
under HIPAA. Furthermore, in the event of a breach as defined by HIPAA, there are reporting requirements to the Office of Civil Rights
under the HIPAA regulations as well as to affected individuals, and there may also be additional reporting requirements to other state
and federal regulators, including the Federal Trade Commission, and to the media. Issuing such notifications can be costly, time and
resource intensive, and can generate significant negative publicity. Breaches of HIPAA may also constitute contractual violations, including
violation of the Company’s Business Associate contracts with Covered Entities from which the Company receives PHI, that could lead
to contractual damages or terminations.
If
we are unable to effectively adapt to changes in the healthcare industry, our business may be harmed.
Federal,
state, and local legislative bodies frequently pass legislation and promulgate regulations relating to healthcare reform or that affect
the healthcare industry. As has been the trend in recent years, it is reasonable to assume that there will continue to be increased government
oversight and regulation of the healthcare industry in the future. We cannot predict the ultimate content, timing, or effect of any new
healthcare legislation or regulations, nor is it possible at this time to estimate the impact of potential new legislation or regulations
on our business. It is possible that future legislation enacted by Congress or state legislatures, or regulations promulgated by regulatory
authorities at the federal or state level, could adversely affect our business. It is also possible that the changes to federal healthcare
program reimbursements to providers who purchase our products or use our services may serve as precedent to possible changes in other
payors’ reimbursement policies in a manner adverse to us. Similarly, changes in private payor reimbursements could lead to adverse
changes in federal healthcare programs, which could have a material adverse effect on our business, financial condition, cash flows,
and results of operations.
There
can be no assurance that we will be able to successfully address changes in the current regulatory environment. Some of the healthcare
laws and regulations applicable to us are subject to limited or evolving interpretations, and a review of our business or operations
by a court, law enforcement, or a regulatory authority might result in a determination that could have a material adverse effect on us.
Furthermore, the healthcare laws and regulations applicable to us may be amended or interpreted in a manner that could have a material
adverse effect on our business, financial condition, cash flows and results of operations.
Recent
economic trends could adversely affect our financial performance.
Economic
downturns and declines in consumption in the healthcare market may affect the levels of both our sales and profitability. If a downturn
in economic conditions occurs, or if there is deterioration in financial markets and major economies, our financial performance could
be adversely affected. The tightening of credit in financial markets may adversely affect the ability of our customers and suppliers
to obtain financing, which could result in a decrease in, or deferrals or cancellations of, the sale of our products and services. In
addition, weakening economic conditions may result in a decline in spending for ART and fertility assistance that could adversely affect
our business operations and liquidity. We are unable to predict the likely duration and severity of any disruption in the domestic and
global financial markets.
Social
media platforms present risks and challenges.
The
unauthorized use of certain social media vehicles could result in the improper collection and/or dissemination of personally identifiable
information causing brand damage and various legal implications. In addition, negative or inaccurate social media posts or comments about
us on any social networking site could damage our brand, reputation, and goodwill.
Risks
Related to Our Common Stock
Our
common stock is subject to risks arising from restrictions on reliance on Rule 144 by shell companies or former shell companies.
Under
a SEC rule known as “Rule 144”, a person who has beneficially owned restricted
securities of an issuer and who is not an affiliate of that issuer may sell them without registration under the Securities Act provided
that certain conditions have been met. However, Rule 144 is unavailable for the resale of securities issued by an issuer that is a shell
company or that has been at any time previously a shell company. The SEC defines a shell company as a company that has no or nominal
operations and either (i) no or nominal assets, (ii) assets consisting solely of cash and cash equivalents, or (iii) assets consisting
of any amount of cash and cash equivalents and nominal other assets. We are a former shell company.
The
SEC has provided an exception to this unavailability if and for as long as the following conditions are met: (a) the issuer of the securities
that was formerly a shell company has ceased to be a shell company; (b) the issuer of the securities is subject to the reporting requirements
of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended; (c) the issuer of the securities
has filed all Exchange Act reports and materials required to be filed, as applicable during the preceding 12 months, other than certain
Current Reports on Form 8-K; and (d) at least one (1) year has elapsed form the time the issuer filed current comprehensive disclosure
with the SEC reflecting its status as an entity that it is not a shell company.
Because
of our prior history as a shell company, stockholders who receive our restricted securities will only be able to sell them pursuant to
Rule 144 without registration for only as long as we continue to meet the requirements set forth above. No assurance can be given that
we will meet these requirements going forward. Furthermore, any non-registered securities we sell in the future or issue will have limited
or no liquidity until and unless such securities are registered with the SEC and/or until we comply with the foregoing requirements.
As
a result, it may be harder for us to raise funding through the sale of debt or equity securities unless we agree to register such securities
with the SEC, which could require us to deploy additional resources. In addition, if we are unable to attract additional capital, it
could have an adverse impact on our ability to implement our business plan and/or sustain our operations. Our status as a former “shell
company” could prevent us from raising additional funds to develop additional technological advancements, which could cause the
value of our securities to decline in value.
A
portion of the ownership of our common stock is concentrated in a small number of investors, some of whom are affiliated with our board
of directors and management.
Our
management and board of directors own approximately 7.5% of our issued and outstanding shares of common stock. By virtue of such
holdings, they have the ability to exercise influence over our business and affairs, including matters requiring approval by our stockholders
including but not limited to the following actions:
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a merger, sale of assets, or other corporate transaction. |
Our
directors have the right to authorize the issuance of shares of our preferred stock and additional shares of our common stock.
Our
directors, within the limitations and restrictions contained in our articles of incorporation and without further action by our shareholders,
have the authority to issue shares of preferred stock from time to time in one or more series and to fix the number of shares and the
relative conversion and voting rights, and terms of redemption, liquidation preferences and any other preferences, special rights and
qualifications of any such series. While we have no intention of issuing shares of preferred stock at the present time, we may seek to
raise capital through the sale of our securities and may issue shares of preferred stock in connection with a particular investment.
Any issuance of shares of preferred stock could adversely affect the rights of holders of our common stock.
Should
we issue additional shares of our common stock, each investor’s ownership interest in our stock would be proportionally reduced.
The
indemnification rights provided to our directors, officers and employees may result in substantial expenditures by us and may discourage
lawsuits against its directors, officers and employees.
Our
articles of incorporation and applicable Nevada law provide for the indemnification of our directors, officers, employees. The foregoing
indemnification obligations could result in us incurring substantial expenditures to cover the costs of settlement or damage awards against
directors, officers and employees, which we may be unable to recoup. These provisions and resultant costs may also discourage us from
brining a lawsuit against out directors and officers for breaches of their fiduciary duties and may similarly discourage the filing
of derivative litigation by our stockholders against our directs or officer even though such actions, if successful, might otherwise
benefit us and our stockholders.
Our
shares of common stock are thinly traded, and the price may not reflect our value; there can be no assurance that there will be an active
market for our shares now or in the future.
We
have a trading symbol for our common stock (“INVO”) and our common stock is currently listed on the Nasdaq Capital
Market.
Our
shares of common stock are thinly traded, and as such the price, if traded, may not reflect our value. There can be no assurance that
there will be an active market for our shares of common stock either now or in the future. The market liquidity will be dependent on,
among other things, the perception of our operating business and any steps that our management might take to bring us to the awareness
of investors. There can be no assurance given that there will be any awareness generated or, if given, that it will be positive.
Consequently,
investors may not be able to liquidate their investment or may be able to liquidate it only at a price that does not reflect the value
of the business. If a more active market should develop, the price may be highly volatile. Due to the possibility of our common stock
being priced lower than its actual value, many brokerage firms may not be willing to effect transactions in the securities. Even if an
investor finds a broker willing to effect a transaction in the shares of our common stock, the combination of brokerage commissions,
transfer fees, taxes, if any, and any other selling costs may exceed the selling price.
Our
failure to meet the continued listing requirements of the Nasdaq Stock Market could result in a delisting of our common stock.
We
are required to satisfy the continued Nasdaq listing requirements. If we fail to satisfy the continued listing requirements of the Nasdaq
Stock Market, such as the corporate governance requirements or the minimum closing bid price requirement, Nasdaq may take steps to delist
our common stock. Such a delisting would likely have a negative effect on the price of our common stock and would impair your ability
to sell or purchase our common stock when you wish to do so. In the event of a delisting, we would take actions to restore our compliance
with Nasdaq’s listing requirements, but we can provide no assurance that any such action taken by us would allow our common stock
to become listed again, stabilize the market price or improve the liquidity of our common stock, prevent our common stock from dropping
below the Nasdaq minimum bid price requirement or prevent future non-compliance with Nasdaq’s listing requirements.
Our
common stock may be subject to the “penny stock” rules of the SEC, which will make the shares of our common
stock more difficult to sell.
Our
shares of common stock are subject to the “penny stock” rules of the Exchange Act. The Exchange Act defines “penny
stock” as any equity security that has a market price of less than $5.00 per share, subject to certain restrictions. We anticipate
our common stock may continue to be considered a penny stock in the future.
The
penny stock rules require broker-dealers to deliver to potential investors a standardized risk disclosure document prepared by the SEC,
which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer must also
provide the potential investor current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson,
and monthly account statements showing the market value of each penny stock held in the investor’s account. The bid and offer quotations,
and the broker-dealer and salesperson compensation information must be given to the potential investor orally or in writing prior to
completing the transaction and must be given to the potential investor in writing before or with the investor’s confirmation.
In
addition, the penny stock rules require that prior to a transaction the broker-dealer make a special written determination that the penny
stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. The penny stock
rules are burdensome and may reduce purchases of any offerings and reduce the trading activity for shares of our common stock. As long
as our shares of common stock are subject to the penny stock rules, the holders of such shares of common stock may find it more difficult
to sell their securities.
The
market for penny stocks has experienced numerous frauds and abuses, which could adversely affect investors in our stock.
We
believe that the market for penny stocks has suffered from patterns of fraud and abuse. We believe that many of these abuses have occurred
with respect to the promotion of low-price stock companies that lacked experienced management, adequate financial resources, an adequate
business plan and/or marketable and successful business or product. Because our shares are penny stocks, the share price for our common
stock may be adversely affected such frauds and abuses involving other penny stocks.
We
do not expect to pay any dividends to shareholders.
To
date, we have never declared or paid any dividends to our stockholders. Our board of directors does not intend to distribute dividends
in the near future. The declaration, payment and amount of any future dividends will be made at the discretion of the board of directors,
and will depend upon, among other things, the results of our operations, cash flows and financial conditions, operating and capital requirements,
and other factors as the board of directors considers relevant. There is no assurance that future dividends will be paid to stockholders.
In the event dividends are paid to stockholders, there is no assurance with respect to the amount of any such dividend.
Our revenue and operating results could fluctuate
significantly from quarter to quarter, which may cause our stock price to decline.
Since our inception, we have not generated significant
revenue. Our results from year-to-year and from quarter-to-quarter have, and are expected to continue to, vary significantly based on
ordering cycles of distributors and partners. As a result, we expect period-to-period comparisons of our operating results may not be
meaningful as an indication of our future performance for any future period.
We
may have difficulty raising the necessary capital to fund operations because of the thin market and market price volatility for
our shares of common stock.
Throughout
2021, there has been a thin market for our shares, and the market price for our shares has been volatile. In recent years, the securities
markets in the U.S. and around the world have experienced a high level of price and volume volatility, and the market price of securities
of many companies have experienced wide fluctuations that have not necessarily been related to the operations, performances, underlying
asset values or prospects of such companies. For these reasons, we expect our shares of common stock may also be subject to volatility
resulting from market forces over which we will have no control. The success of our products and services may be dependent upon our ability
to obtain additional financing through debt and equity or other means. The thin market for our shares, and the volatility in the market
price for our shares, may adversely affect our ability to raise needed additional capital.
General
Risk Factors
Shareholders
may be diluted significantly through our efforts to obtain financing and from issuance of additional shares of our common stock, including
such issuances of shares for services.
To
satisfy certain financial obligations, we have issued and may continue to issue shares of our common stock and we have incurred and may
continue to incur debt, which may be convertible into shares of our common stock. We may attempt to raise capital by selling shares of
our common stock, possibly with warrants, which may be issued or exercised at a discount to the market price for our common stock. These
actions would result in dilution of the ownership interests of existing shareholders, and may further dilute the common stock book value,
and that dilution may be material. Such issuances may also serve to enhance existing management’s ability to control us as the
shares may be issued to our officers, directors, new employees, or other related parties.
We
are subject to the reporting requirements of U.S. federal securities laws, which can be expensive.
We
are a public reporting company and accordingly subject to the information and reporting requirements of the Exchange Act, and
other federal securities laws, including compliance with the Sarbanes-Oxley Act of 2002. We are required to prepare and file annual and
quarterly reports, proxy statements and other information with the SEC and furnishing audited reports. Compliance with such reporting
requirements is both time-consuming and costly for us. We may need to hire additional financial reporting, internal control, and other
finance personnel in order to develop and implement appropriate internal controls and reporting procedures.
In
addition, the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Wall Street Reform and Consumer Protection Act, as well as rules implemented
by the SEC and the securities exchanges, require certain corporate governance practices for public companies. Our management and other
personnel have devoted and expect to continue to devote a substantial amount of time to public reporting requirements and corporate governance.
These rules and regulations have significantly increased our legal and financial compliance costs and made some activities more time-consuming
and costly. If these costs are not offset by increased revenues and improved financial performance, our financial condition and results
of operations may be materially adversely affected. These rules and regulations also make it more difficult and more expensive for us
to obtain director and officer liability insurance in the future. Additionally, we may be required to accept reduced policy limits and
coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to
attract and retain qualified personnel to serve on our board of directors or as executive officers.
Failure
to comply with internal control attestation requirements could lead to loss of public confidence in our financial statements and negatively
impact our stock price.
Pursuant
to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to conduct an annual management assessment of the effectiveness of
our internal controls over financial reporting. If we fail to timely develop our internal controls, and management is unable to make
this assessment, or, once required, if the independent registered public accounting firm cannot timely attest to this assessment, we
could be subject to regulatory sanctions. As a result, a loss of public confidence in our financial controls and the reliability of our
financial statements may develop ultimately negatively impacting our stock price and our ability to raise additional capital when and
as needed.